Allahabad High Court
Commissioner Of Income-Tax vs J.K. Cotton Spinning & Weaving Mills Co. ... on 21 July, 1986
Equivalent citations: (1986)57CTR(ALL)215, [1987]164ITR18(ALL), [1986]29TAXMAN207(ALL)
Author: A.P. Misra
Bench: N.D. Ojha, A.P. Misra
JUDGMENT A.P. Misra, J.
1.The Income-tax Appellate Tribunal, Allahabad Bench, Allahabad, has under Section 256(1) of the Income-tax Act, 1961 (hereinafter referred to as "the Act"), referred the following question to this court by means of its order dated September 21, 1976 :
"Whether, on the facts and in the circumstances of the case, the compensation received by the assessee in a sum of Rs. 5,55,850 could be assessed as capital gains under Section 45(1) of the Income-tax Act, 1961?"
2. The assessee-company runs a cotton spinning and weaving mill and a rayon mill. There was a fire in the spinning department of the cotton mill on November 28/29, 1962. It follows the calendar year as its year for accounting. The assessee received a sum of Rs. 9,13,678 as compensation from the insurance company. According to the assessee, out of this sum, it received Rs. 7,26,976 in the previous year (assessment year 1964-65) and the balance amount of Rs. 1,86,702 in the following year. The Income-tax Officer did not accept the assessee's contentions and held that since the major part of the claim had been received during the previous year relevant to the assessment year 1964-65 and as the assessee follows the mercantile system of accounting, the entire amount receivable had become due in that year and was liable to be included in the income of that year. He further held that the excess realisation after considering depreciation was "capital gains" and not capital receipt as the assessee had received compensation money for the assets destroyed. He, therefore, brought to tax Rs. 2,35,683 as profit under Section 41(2) of the Act and the balance amount of Rs. 6,77,995 as capital gains under Section 45 of the Act. In the present reference, we are only concerned with the question of capital gains under Section 45(1) of the Act. The Appellate Assistant Commissioner held that the compensation received for the assets destroyed by fire was not chargeable under the head "Capital gains ".
3. The Revenue filed an appeal against this order before the Appellate Tribunal. There was some dispute in respect of the actual amount but the amount which was finally settled before the Tribunal was Rs. 5,55,850. The appellate court held that the view taken by the Appellate Assistant Commissioner was absolutely correct and the destruction by fire was not covered by the definition of "transfer" given under Section 2(47) of the Act. It further held that the word "transfer" in its ordinary and plain meaning postulated a bilateral act, that is, a voluntary act between two or more parties. The definition uses the words sale, exchange or relin-quishment of the rights therein or the compulsory acquisition thereof. It held, therefore, that the destruction by fire could not be covered by the expression "extinguishment of any right" in a 'capital asset'. It further held that capital gains would not arise when a party acquires an actionable claim or when an actionable claim is satisfied. According to the Tribunal, in the receipt of compensation for an actionable claim which comes into existence because of destruction by fire, the transaction does not amount to an exchange. The Revenue being aggrieved against the said order, made an application under Section 256(1) of the Act and the Appellate Tribunal by its order dated September 21, 1976, referred the aforesaid question of law to this court.
4. The contention raised by learned standing counsel, Sri Markandey Katju, for the Revenue was that by virtue of the definition of the word "transfer" under Section 2(47) of the Act, the case of the assessee would be covered by it. Section 2(47) of the Act is quoted below :
"2. (47) 'transfer' in relation to a capital asset, includs the sale, exchange or relinquishment of the asset or the extinguishment of any rights therein or the compulsory acquisition thereof under any law."
5. He urged that by virtue of this definition, the extinguishment of any right is included as amounting to "transfer" in respect of a capital asset. He, therefore, urged that if by fire in the spinning department of the assessee's cotton mill, the machineries were destroyed, it would amount to extinguishment of his rights therein and any amount received by him as compensation in lieu thereof would be covered by Section 45(1) of the Act. He, therefore, urged that both the Appellate Assistant Commissioner and the Appellate Tribunal committed an error in not holding it to be capital gains. For this, he placed reliance on two decisions, namely, Marybong & Kyel Tea Estates Ltd. v. CIT [1981] 129 ITR 661 (Cal) and the case of CIT v. Vania Silk Mitts (P.) Ltd. [1977] 107 ITR 300 (Guj).
6. In Marybong & Kyel Tea Estates Ltd.'s case [1981] 129 ITR 661 (Cal), no doubt, it was held that the capital asset was damaged by fire and the amount paid by the insurance company was assessable as capital gains. However, this decision is based on slightly different facts. In that case, reliance was placed on condition No. 12 of the insurance policy according to which on the happening of any loss or damage to any property insured, the insurer was entitled to take possession or require to be delivered to them any property of the insured in the building or on the premises at the time of the loss or damage. On the facts, it was held there that originally the asset belonged to the assessee and part of it remained after the fire in a changed form and shape and that which remained was transferred to the insurer and as a result of this transfer, the assessee received compensation which was assessed to capital gains. In our case, there are no such facts nor any such condition as condition No. 12 of the insurance policy nor is it clear whether certain asset remained or not which was transferred to the insurance company. Therefore, reliance placed by learned counsel for the Revenue could not be of much help.
7. The case of CIT v. Vania Silk Mills (P.) Ltd. [1977] 107 ITR 300 (Guj), the second case relied on by the Revenue, has some bearing on the question raised in this case. In that case also, the machinery in the premises of the insured was covered by the insurance, the insurer paid the value of the machinery to the insured and took away the damaged machinery. However, this decision is not based on either any condition of the policy or the fact that the insurance company took away the remainder of the damaged property as in the earlier case. In this case, the assessee was a private limited company and it purchased machinery and gave it on hire to M/s. Jasmine Mills Pvt. Ltd., Bombay. The said machinery was insured not by the assessee but by the latter company when the fire broke out in the premises causing extensive damage to the machinery hired. The latter company after receiving compensation from the insurance company paid to the assessee-company, the proportionate amount to be paid for the machinery hired by it. It was in this background that the question was raised whether such amount received by the assessee-company would be capital gains. On these facts, it was held that this amounted to extinguishment of the right of the assessee in the capital asset and there could be no other conclusion than that there was a "transfer" of the capital asset within the meaning of Section 45(1) read with Section 2(47) of the Act. We have carefully examined this case and respectfully agree with the view taken by the Gujarat High Court in this case. However, we further supplement our reasons hereinafter, while considering the argument of learned counsel for the assessee.
8. Learned Advocate-General, Sri V. B. Upadhya, appearing for the assessee, has strongly urged that under Section 2(47) of the Act, there has to be a "transfer" of the capital asset and since in the case of receipt of insurance money as compensation, there is no element of "transfer", it would not attract Section 45(1) of the Act. He further urged that the words referred to under Section 2(47) are "extinguishment of any rights there-in" (emphasis* supplied) and not extinguishment of the capital asset and thus it conceives only of cases where there is extinguishment of right in the property and not the extinguishment of the property itself. Therefore, he urged that in case of extinguishment of the property by fire, the property itself is extinguished which is a capital asset and thus it would not be covered under this definition. He further urged that since there is no transfer of any capital asset, there could be no capital gains chargeable from the assessee. His main thrust was that in the case of insurance of the goods, the assessee actually paid the premium and received the compensation from the insurance company not on account of extinguishment of the asset but on account of the said premium, and therefore, it could not be a sum receivable in lieu of the capital asset. He relied on the case of Deepchand Nayak v. Madhya Pradesh State Road Transport Corporation, AIR 1977 MP 42. It was held in that case that "transfer" must carry with it "from" and "to". If either of them is wanting, there can be no transfer. We are of the view that the said decision does not help the assessee inasmuch as it merely referred to the word "transfer" in general terms in common parlance and not with reference to a definition Clause specifically given by a statute in a particular setting of a statute. It is well settled in law that the Legislature could always give a meaning to a word in the context of a particular statute for carrying out its object. It is only in the absence of such a definition that the meaning of the word in general terms could be taken into consideration. Admittedly, therefore, the case of Deepchand Nayak, AIR 1977 MP 42, of the Madhya Pradesh High Court could not lend any support to the contention in favour of the assessee.
9. Reliance was placed next on the case of CIT v. R. M. Amin [1977] 106 ITR 368 (SC). This case really arose out of the decision in CIT v. R. M. Amin [1971] 82 ITR 194 (Guj) which was relied on in the case of CIT v. Vania Silk Mills (Pvt.) Ltd. [1977] 107 ITR 300 (Guj), on which counsel for the Revenue placed strong reliance. In this case, the assessee held 192 shares in a private limited company. The said company went into voluntary liquidation. As per account, the assessee received the amount in lieu of his shares. The Income-tax Officer in that case treated this amount as capital [gains liable [to be taxed under Section 45 of the Act. The central question which arose was about the meaning of word " transfer" in Section 2(47) of the Act. The High Court in that case came to the conclusion that "transfer" contemplated under Section 45 should be one as a result of which consideration is received by the assessee or accrues to him. When a shareholder received money representing his shares on the distribution of the net assets of the company in liquidation, he received that money in satisfaction of the right which belonged to him by virtue of his holding the shares and not by any operation of any transaction which amounted to sale, exchange, relinquishment, transfer of a capital asset or extinguishment of any rights in capital assets, and thus there could be no capital gains. The Supreme Court in this case relied on its earlier decision in the case of CIT v. Madurai Mills Co. Ltd. [1973] 89 ITR 45. It was held therein that distribution by the liquidator of the assets of the company in the case of voluntary liquidation does not result in the creation of new rights. It merely intended recognition of the right which existed prior to its distribution.
10. The learned Advocate-General made an attempt to apply the above reasoning to the present case. According to him, even in this case, the compensation paid by the insurance company did not result in the creation of new rights as the assessee merely received the amount in lieu of his existing right. We are of the view that this argument is untenable. In that case, the Supreme Court interpreted the word "transfer" on different facts. That was a case of redistribution of the share money invested by the shareholder during voluntary liquidation. In that case, the share which formed the capital assets was only redistributed to the shareholders in the voluntary liquidation of the company. In the present case, there is no investment of any capital asset by the assessee with the insurance company. Similarly, there could be no question of either redistribution or receipt back of its right which it had invested at the happening of a contingency under the insurance and thus it could not be said that this decision in any way helps the assessee. In the present case, there is a separate transaction of contract between the assessee and insurance company and in lieu of this transaction, it received the compensation. In the case of R. M. Amin [1977] 106 ITR 368 (SC) there was transaction under which shareholders received back their money.
11. Learned counsel for the assessee next relied on Salmond on Jurisprudence, 12th edition, page 332/333. The relevant portion is quoted here-under:
"We have seen that titles are of two kinds, being either original or derivative. In like manner divestitive facts are either extinctive or alienative. The former are those which divest a right by destroying it. The latter divest a right by transferring it to some other owner.....The transfer of a right is an event which has a double aspect. It is the acquisition of a right by the transferee, and the loss of it by the transferor. The vestitive facts, if considered with reference to the transferee, is a derivative title..... The transfer of a right does not in legal theory affect its personal identity; it is the same right as before, though it has now a different owner."
12. Emphasis was made by the learned Advocate-General that in the case of "transfer", there has to be a transferor and a transferee and after transfer, the same right is received by the transferee and only ownership changes. According to him, in the present case, none of these ingredients is present and, therefore, it could not be a transfer of the capital asset. The aforesaid argument loses sight of the definition of the word "transfer" given under Section 2(47) of the Act. It could not be doubted that in case of normal transfer, the principle as referred to in the book by Salmond could be fully applicable. But as said earlier, when the Legislature gives a special meaning to a particular word in a particular statute, then that meaning is to be given to that word. It is well-settled that the Legislature by legal fiction sometimes conceives of a thing which otherwise could not be conceivable even by a miscroscopic examination. But if the legislative intent is clear, and if only that meaning could be derived in a particular statute, then courts have always given that meaning to that word.
13. It would be relevant to refer here to the judgment of Lord Asquith in East End Dwellings Co. Ltd. v. Finsbury Borough Council [1952] AC 109 at p. 132 ; [1951] 2 All ER 587 at p. 599, in which it was observed as follows :
" If you are bidden to treat an imaginary state of affairs as real, you must surely, unless prohibited from doing so, also imagine as real the consequences and incidents which, if the putative state of affairs had in fact existed, must inevitably have flowed from or accompanied it......
The statute says that you must imagine a certain state of affairs. It does not say that, having done so, you must cause or permit your imagination to boggle when it comes to the inevitable corollaries of that state of affairs....."
14. As such, if under Section 2(47) of the Act, the Legislature contemplated a transfer, may be imaginary, in a case of extinguishment of a right and if that includes extinguishment of the asset itself by fire or destruction, it would still be a case of transfer. The extinguishment of right may be by extinguishment of the property. It cannot be doubted that the right is also extinguished in a property when it ceases to exist. The definition which only speaks of extinguishment of the right in property, in our opinion, would also include a case where there is extinguishment of that property also. The aforesaid view of Lord Asquith found the approval of the Supreme Court in the case of Bengal Immunity Co. Ltd. v. State of Bihar [1955] AIR 1955 SC 661, at p. 680. The aforesaid passage lends support to the view we are taking in interpreting the word "transfer" mentioned under Section 2(47) of the Act. Here, the "transfer" is in relation to a capital asset which includes "extinguishment of any rights therein." Emphasis was made by the learned Advocate-General that it speaks only of extinguishment of right and not extinguishment of the asset. He further urged that Section 41 of the Act uses the word "destroyed" in respect of a capital asset and if the Legislature intended to mean destruction of the asset here also it would have used the word "destroyed". In other words, his argument was that for carrying the same meaning, two different words could not have been used in the same statute. At first, his argument seemed attractive but on a deeper examination of the definition clause, and considering the other provisions of the Act and the object sought to be achieved, we have no hesitation in rejecting the interpretation advanced by the assessee.
15. The words "extinguishment of any rights therein" have a wider meaning than mere destruction as used in Section 41(2) of the Act. This word has very wide amplitude covering every possible transaction and situation which results in the destruction, annihilation, extinction, termination, cessation or cancellation of any bundle of rights either qualitative or quantitative that the assessee had in the capital asset comprising either movable or immovable property. We are of the clear view that the word "transfer" spoken of in respect of "extinguishment of any rights therein", clearly includes a case where there is extinguishment of the capital asset. It is an artificial definition given in this statute of the word "transfer" by legal fiction. If the argument of learned counsel for the assessee is accepted, it would mean that it would only cover such cases where there is extinguishment of right without extinguishment of the capital asset. This would render the amendment made by introducing the words "extinguishment of any rights" as futile. In fact, in every case of sale, exchange or relinquishment, there is only extinguishment of the right, and the capital asset remains as being transferred to the transferee. In view of this, there was no reason to bring in these words. Section 2(47) already used these words "sale, exchange or relinquishment". In each of these transactions, there is extinguishment of right. In our considered opinion, the words "extinguishment of any rights therein" included the case of extinguishment of such right even where there is extinguishment of the capital asset also. A right in any property could be extinguished even when the property ceases to exist. It cannot be doubted that when a capital asset ceases, the right is also extinguished therein. We have no hesitation in holding that it covers cases where there is extinguishment of the capital asset also.
16. Looking from another angle, for argument's sake even if it is accepted that it only covers cases where there is only extinguishment of the right and not the asset, the argument on behalf of the assessee could not be accepted. The money received by the assessee as compensation is, in fact, in lieu of his capital asset which was extinguished and thus the form of the capital asset is only changed, from one which existed before the fire and later when the compensation was received, i. e., from machinery to cash. In order to support his argument that the word "transfer" should be given the meaning which is ordinary, popular and in its natural sense, he has relied on the case of CGT v. N. S. Getti Chettiar [1971] 82 ITR 599 (SC). This very decision further holds that in spelling out the meaning of words in a section, one must take into consideration the setting in which those terms are used and the purpose they are intended to serve. In the present case, where the definition of the word "transfer" has given to it a special meaning different from the meaning in its ordinary, popular and natural sense, then in order to carry out the intent of the Legislature, it is necessary to give it that meaning. It is also pertinent in this connection to mention Section 45(3) of the Act. By this section, "plant" is defined to include "books". It cannot be doubted that the meaning of the word "plant" in its ordinary, general and popular sense could not include "books" but since the Legislature included it by a legal fiction, that meaning is to be given to that word. Thus, this authority cited by learned counsel for the assessee does not lend support to him. The Legislature has given special meaning to the word "transfer" in Section 2(47) and in such a case when the intention of the Legislature is explicit, it would not be right to give a meaning different from it, as is known in natural sense. It would be useful here to quote from "The Law and Practice of Income Tax" by Kanga and Palkhivala, 7th edn., Vol. 1, p. 144: "Where property is insured, receipts under the policy would be capital or trading receipts according as the policy relates to capital or trading assets".
17. Learned counsel for the assessee then relied on Black's Law Dictionary, fifth edition, at page 721, and Dictionary of English Law, by Earl Jowitt, 1st Edition, 2nd impression, at page 985. This merely defines the word "insurance" as a contract whereby, for a stipulated consideration, one party undertakes to compensate the other for loss on a specified subject by specified perils, the agreed consideration is the "premium", the written contract, a "policy", etc. The learned Advocate-General tried to build up his argument that the money received by the insurer is not for extinguishment of the right in the property but is in lieu of the premium which he has paid under the contract. His argument thus was that the money received could not form part of the capital asset. This argument is devoid of any merit and we have no hesitation in rejecting the same. The money received is the money in lieu of the property insured and the premium amount is only the consideration for the contract under the policy. The agreement into which the insurance company enters with the person who is insured, is really in the form of a trade or business. In the changing socio-economic order, with the fact of scientific advancement in the hazards of business and trade, the facets of business have also changed. Insurance company on this fertility has sprouted its crops by insuring different trades and businesses with the object of gain in its business. In some cases, there may be loss to it on account of occurring of the contingencies stipulated under the policy but, in other cases, there may be benefit due to continuous long payment of premium under the policy, on account of non-happening of the contingency and even where payment is stipulated after long payment of premium as in cases of life insurance, the amount received is always less than what is actually paid. Thus, premium is in fact in lieu of business which the insurance company enters into with the objective of gain therein. Similarly, the business community with the hazards of trades and businesses vis-a-vis loss by fire, destruction, riot and death of workers, etc., for its security, to overcome the loss, business gets itself insured. With this, they flourish in their business with the confidence that they shall be either compensated for loss or be paid in lieu of the asset as per policy. In modern society, insurance plays a very vital role in every trade and business. In fact, the insured and insurer inevitably give complementary business to each other. In this way, both the insurance company and the insured are gainers. It is significant to mention that the premium for the insurance of building, machinery, plant, furniture, stocks or stores are allowed under Sections 30(c), 31(ii) and 36(1) while dealing with the other kind of insurance, it is deductible under Section 37 of the Act. Thus, the insured gets the benefit of the deduction of the premium from his income as it is a part of maintenance of his profession or business and other expenditure, or is allowed to give incentive to the individual to secure safety and security of his family and thus benefiting both the subject and the insurer. It cannot be doubted that insurance is also a business taxable under the Income-tax Act. Reference may be made to Section 2(24)(vii) and to Section 44 and the First Schedule to the Act. The Schedule gives the subject matter for computing income from insurance since the profit of insurance business cannot be arrived at by ordinary method of accounting. Rules 1 to 4 state about the profit of life insurance business; Rule 5 applies to any business of insurance other than life insurance and Rule 6 to non-resident person carrying on insurance business. Thus, we are of the opinion that the assessee when he receives money as compensation for the extinguishment of his property where his right is also extinguished, he receives that money in lieu of that property, the money is not received in lieu of the premium as urged by the learned Advocate-General; premium is only the consideration for the business under the policy.
18. In view of the aforesaid, we are of the opinion that the compensation received by the assessee in the sum of Rs. 5,55,850 is a sum received by it on the extinguishment of its right in the property insured and thus it would be a transfer within the meaning of Section 2(47) of the Act and thus is capital gains under Section 45(1) of the Act. In view of this, the reference made to this court by the Appellate Tribunal on the aforesaid question is answered in the affirmative, in favour of the Revenue and against the assessee.
19. In the circumstances of the case, costs shall be borne by the parties.